What Lies Ahead: Stimulus Checks, Higher Taxes?

David Wessel moderates an ongoing debate on economics between two of the campaigns’ top policy advisers. Click here to read the economics debate so far. Reader comments are welcome and may be used as questions in the debate.

QUESTION #2:Doug, the Obama campaign suggests that the economy needs another jolt of fiscal stimulus, a $1,000-a-family check. You think that’s a bad idea? Why? Are you saying that the McCain remedy for a weakening economy is to reduce business taxes and increase oil production?

Jason, you say this $1,000-a-family check would be paid for by taxing oil-company profits. Ok. But Doug points out that there are lots of tax changes in the various Obama proposals. Help us out here: Compared to today’s taxes and looking at all his proposals, does Mr. Obama propose to INCREASE taxes overall (taking the entire economy into account) or DECREASE them or just shift the tax burden around?

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Douglas Holtz-Eakin serves as policy director for the McCain campaign. Click here for Holtz-Eakin’s full bio.

Senator Obama’s proposed “$1,000 energy rebate” is advertised to “provide some short-term relief from high gas prices,” yet the check bears absolutely no relationship to a person’s rising energy costs. The person who lives in an apartment and takes mass transit would get the same relief from this proposal as the trucker who is paying $1,000 more just to fill up his tractor-trailer’s fuel tank. Unlike Senator McCain, his plan offers no solution to match the problem and any proposed relief is denounced as a gimmick that won’t work.

Senator McCain does believe that the economy is weak and needs help. It suffers from two main problems: high energy costs and housing market distress. He has comprehensive proposals on the former, pushed his HOME plan for the latter, and supported the bipartisan compromise when it became apparent his preferred housing proposal would not pass.

Obama’s proposal for temporary checks financed by prohibitive taxes on oil companies (on top of the typical 35 percent, oil companies would have to give up another 40 percent or so to finance the checks) will not effectively address any of the real problems – and make some worse. Senator McCain would prefer to permanently keep individual taxes low and remove the depressing uncertainty facing households, has structured his business-tax proposals to front-load their impact, and has voiced the strong commitment to open trade that will keep the current export stimulus in place.

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Jason Furman is an economic adviser to the Obama campaign. Click here for Furman’s full bio.

It was disappointing to see the McCain campaign fall back into the same old tired rhetoric. Our country faces real, major immediate problems and we won’t solve these problems by arguing about what the corporate tax rate in 2015 should be, as important as that question is for the long-run health of our economy. Why can’t Senator McCain put partisanship aside and support a second round of rebates? Barack Obama believes his fiscally responsible framework is right and that a well-designed windfall profits tax is fair and as the non-partisan Congressional Research Service wrote “economically effective.” But rather than just dismiss this out of hand, why doesn’t Senator McCain come to the table and offer his own solution? If he does not think it is fair to give all families a flat $1,000, what would be a better way to target relief of this magnitude? Does Senator McCain deny families need the relief and that it would help maintain aggregate demand at a time when many are worried about macroeconomic weakness in the second half of the year? These are short-run steps and would work best if they were integrated with long-run reforms that restore fiscal discipline and address our major challenges in health, energy and modernizing the reform of our financial system. But we should not hold these short-run measures hostage to the debate over these long-run plans.

Last week the “Gang of 10,” five Democratic Senators and five Republicans Senators, led by Senator Kent Conrad and Saxby Chambliss and including top McCain adviser Senator Lindsey Graham, came out with a compromise proposal that would invest billions in fuel-efficient cars, help our automakers re-tool, and make a genuine commitment to renewable energy. Like many compromises, it also includes steps that Obama hasn’t always supported. He remains skeptical that new offshore drilling will bring down gas prices in the short-term or significantly reduce our oil dependence in the long-term. But Obama has always believed that finding consensus will be essential to solving our energy crisis, and this package represents a good faith effort.

However, instead of constructively engaging with the bipartisan compromise, Senator McCain rejected it because he objected to the fact that the package was fiscally responsible and paid for by repealing domestic manufacturing deductions for oil and gas companies. This stance itself is odd because Senator McCain’s advisers had previously said that Senator McCain supported repealing the domestic manufacturing deduction for all companies. [See Tax Policy Center, 7/23/08, p. 16: "[McCain] has proposed repeal of the domestic production activities deduction”]. So why object to the first step of removing it for oil and gas companies? Why not be open to a compromise? Or at least suggest an alternative way to pay for the package?

As to David’s question about the totality of Senator Obama’s tax changes, they are a very large tax cut for middle-class families that is designed to help relieve the squeeze they face, promote economic growth by rewarding work and savings, and simplify the tax code by consolidating existing tax credits and no longer requiring families with simple taxes to have to fill out a return. This is paid for in part by repealing a portion of the tax cuts enacted in recent years for families making over $250,000 per year (taxes for everyone would still be lower than they were in the 1990s, and the tax rate on dividends would be substantially lower than it was in the 1990s) and reforming corporate taxes to eliminate the current bias for overseas investment, codify the economic substance doctrine, tackle overseas tax havens, and eliminate special tax breaks for oil and gas. On net, however, Senator Obama’s tax proposals – including his tax credits for healthcare – are a net tax reduction. This net tax reduction is paid for by net spending cuts – including responsibly ending the war in Iraq, reforms to Medicare advantage payments, payment limits for high-income farmers, reductions in subsidies for banks that make student loans, earmark reform, ending no-bid contracts, and eliminating other wasteful and unnecessary programs.

Comments (5 of 6)

I'm wondering the same thing "Will work for gas... have to". When companies experience an increase in the cost of doing business, they will either decrease their profit margin, or they will just pass this increase on to consumers. A windfall profits tax on the oil and gas industry would lead directly to $7-10 a gallon gasoline. Not this this won't likely happen anyway, but the windfall tax would accelerate it.

2:47 pm August 6, 2008

Will work for gas...have to wrote :

I don't quite understand how taxing the oil companies' profits will lower gas prices in the end. I would think that a windfall tax will only be passed right back onto me, the consumer. I do a lot of driving for my job, I am in sales. So I see customers, drive between appointments, etc.
I am very happy to see gas drop below $4.00 (wink-ha ha) to $3.999 a gallon. If the oil companies have made money, would a portion of that money go to exploration of new oil deposits or to develop cleaner gasoline. It's not like the oil company employees can just dip into the big pile of money they have in the bank. An employee can't go to the local branch of the bank that the oil companies bank at and take out $10,000 in petty cash for themselves. A basic corporation has to account for all the money in and money out. (Remember the Tyco CEO, Dennis Kozlowski and he went to jail for the $6,000 shower curtain that was paid for by the company.)
Being a society built on the premise that capitalism is good or the Gecko "Greed is good." statement, why would we want to tax an industry that we are dependent upon for our lively hood. We need gas for cars, home heat, oil for plastics, etc.
I am in the hospitality industry, not the oil industry. We had some great years and we have been able to renovate our aging properties to be competetive when all of you start traveling for business and pleasure.
Why do we think that the oil companies are stealing from us? I don't like paying high gas prices any more than anyone else. I grumble under my breath every week at the gas pump that I am going to buy a scooter that gets 50 miles to the gallon. I do know that if the only plan Obama has is to tax the big mean oil companies, then he is really throwing another tax on me.
Also, if the basic feed stock goes through the roof, they won't cut their margin for long. The cost of goods sold will increase, maybe not as quickly, but it will go up. Just look at your grocery bills over the last 3 years, you are paying more for less.
so remember proud Americans, a vote for Democrat is a vote for higher taxes!

10:18 am August 6, 2008

Belisarius wrote :

I would like these two economists to explain the economic equivalent of defying gravity that is going on with big oil.

Specifically, when the price of a basic feed stock in your process goes through the roof, a company usually has to cut their margin and their profit falls. This is true of every industry except big oil. Their profits are gushing. Big oil is able to set their margins as a percentage of the price of oil. How can they work this miracle?

Simple. Big oil has been allowed to consolidate into a handful of companies. They are a monopoly and they dictate their prices to us. They need to be broken up or regulated like utilities.

Anyone think this will happen with a republican in the white house?

See you in November.

8:11 pm August 5, 2008

Must read for concerned Americans wrote :

Please read-Americans need to know!!!!!!!!

NHTSA Hearings 8/4/08

I just returned from the NHTSA hearings held on August 4, 2008 in Washington D.C., regarding the Draft Environmental Impact Statement (DEIS) for NEW Corporate Average Fuel Economy standards (CAFÉ) for years 2011-2015.

IMPORTANT FACTS: You will not believe what you are reading.

1) The 414 pages DEIS analysis was based on an average gasoline price of USD $2.16/gallon for 2011-2020. A calculation approved by the NHTSA administrators/managers. Would you believe it???????????

2) The new CAFÉ rules were also established, negotiated and pre-approved by the NHTSA’s management and clearly with the influence of domestic automotive companies and their lobbyists. We have now established fuel standards for 2011-2020 that are presently and already met throughout the rest of the Western world today (see below).

As one guest speaker said today “are they on another planet?”

NHTSA “NEW Fuel Standards” (2011-2015) decision:

Automobiles are to achieve 31.2 mpg by 2011 and 35.7 mpg by 2015. Light trucks are to achieve 25 mpg by 2011, and 28.6 mpg by 2015.

The NTHSA is also setting a goal of 35 mpg on average for 2020.

America needs to know:

The European Union is currently establishing standards, with a goal of reaching 48.9 miles per gallon for new passenger vehicles as early as 2012. The current EU standard already requires more than 40 miles per gallon about 15% higher than the U.S. goal set for 12 years from now.

Japan currently has a standard of about 40 miles per gallon. Japan aims to further improve fuel efficiency by 17% by 2015, reaching 46.9 miles per gallon.

China has a current average of slightly under 35 miles per gallon. Chinese fuel standards are on target to reach the government’s goal of 35.8 miles per gallon by 2009. China will not only meet, but exceed, the goal just established by the United States for 2020 — more than a full decade earlier.

Australia is targeting 34.4 miles per gallon by 2010.

Canada is targeting 34.1 miles per gallon by 2010.

Under the current administration, purchasing an electric vehicle is becoming more of a necessity rather than an alternative.
BG Automotive Group, Ltd.http://www.bgelectriccars.com/